Monday, September 22, 2008

SACRAMENTO — Though there was relief Friday that the unprecedented 81-day budget stalemate was finally over, Democrats couldn't contain their frustration over having to swallow the bitter medicine of their Republican counterparts.

They lost on taxes, having initially proposed a $10 billion tax increase on the wealthy but instead ended up closing a few loopholes — and relenting on corporate tax giveaways that could amount to billions in lost revenues annually. They also wound up making deeper spending cuts than they had vowed in order to close the estimated $15.2 billion budget shortfall.

All this at a time, observers said, when the Republican brand is sinking nationally and in California, public calls for a mix of taxes and cuts are rising, and human services needs are growing. The solution, many Democrats say, is to eliminate the two-thirds vote requirement to pass a budget and taxes, but that's a long way off with an unclear outcome. For the foreseeable future, Republicans — in the minority in both legislative chambers — hold all the cards, and they are able to exert a disproportionate influence where it matters the most: on taxes and spending.

"I am sick at heart about it," said Assemblywoman Loni Hancock, D-Berkeley. "Democrats cave in because they don't want to see the human pain in the short term, and Republicans don't care. And they win."

Democrats, said Lenny Goldberg, president of the California Tax AdvertisementReform Association, were "rolled," starting with their inability to pass a severance tax on oil companies earlier this year, and ending when they had to drop their proposal to tax the wealthy as well as the governor's sales tax increase.

"They left millions on the table," Goldberg said. "The oil tax wouldn't have had any impact on anybody other than Chevron. No effect on production or price. Same with their tax on the wealthy. The problem is you can't even have a rational discussion with Republicans, who all took the (no-tax) pledge."

Worse, he said, Democrats folded on Republicans' insistence on corporate breaks in future years in exchange for a provision that requires corporations and the wealthy to accelerate tax payments this year.

One tax break — called a "carry-back" provision — would let corporations that lose money in a down economy get refund on taxes they paid in profitable years — an outrage, said state Treasurer Bill Lockyer, a Democrat, who blasted the budget agreement Friday.

"So under this budget, the state will be cutting refund checks for corporate behemoths while it's cutting services for people," Lockyer said. "This provision amounts to a giant tax shelter for wealthy corporations."

Goldberg vowed to take the fight to the ballot to try to repeal the corporate breaks.

The Republicans' actions will come back to haunt them, said Bob Mulholland, campaign adviser to the Democratic state party.

"We'll gain legislative seats — that is a given," Mulholland said. "And the behavior and inability of Schwarzenegger to bring the budget on time only hurts Republicans. Will they learn their lesson? Absolutely not. They'll just become smaller and continue repeating their message of no taxes."

Republicans won the game of chicken with Democrats, said Jack Pitney, government professor at Claremont McKenna College, because they were insulated from concerns that their constituents would be hurt by the budget delay.

"Democrats' constituents are more dependent on government services," Pitney said. "And when you're not running government, then slowing down the legislative process isn't such a bad thing."

"The legislature should immediately evaluate our spending and prioritize how every tax dollar is used," he said. "This is the only viable way to ensure resources are available to fund California's priorities."

Taxpayer advocate Jon Coupal sounded a similar cry earlier in the week, calling for zero-base budgeting, a process in which lawmakers would conduct a rigorous review of every program and agency to determine what should be pared back or even completely eliminated.

"This was only partial victory," said Coupal, president of the Howard Jarvis Taxpayers Association. "It won't be complete victory until we hold the line on taxes and start addressing things that have not been talked about: waste, fraud and abuse."

Hancock said Republicans' true aim is to "flush government down the bathtub drain. It's a shame and it's due entirely to the fact we have a two-thirds requirement to pass a budget and a militant Republican minority that wants to shrink government."

Hancock and a number of other Democrats are planning to mount a ballot drive to eliminate the two-thirds requirement that exists in only two other states — Rhode Island and Arkansas.